Commercial law collides with cyberspace: The trouble with perfection - insecurity interests in the new corporate asset

Washington and Lee Law Review, Winter 2002 by Nguyen, Xuan-Thao N

The recent downturn in the economy, particularly in the e-commerce sector, reveals many e-companies heading toward bankruptcy with cyberassets, such as domain names, as their most valuable corporate assets. Lending institutions and other creditors that have extended loans to such e-companies obviously want to get their hands on these bankrupt estates. Which creditor will have priority in the new cybercollateral of domain names? The answer to creditor priority questions may depend on whether domain names are intangible property for purposes of secured transactions. If so, should security interests in domain names be perfected under the Uniform Commercial Code or under federal law? This Article asserts that domain names are a form of intangible property, and that although they are not subject to the tort of conversion, they can be used as collateral in secured transactions. This Article proposes and evaluates two perfection schemes for security interests in domain names. The first proposal follows the existing state-regulated scheme through which creditors perfect their security interests in domain names by filing a financing statement with the applicable state filing office. The second proposal is a federal-based scheme through which creditors perfect their security interests in domain names by electronically filing a financing statement with a domain name registrar who will record the security interest information within the WHOIS database.

I. Introduction

worth $7.5 million.5 Trademark law does not protect these domain names because they are generic terms. Nevertheless, as indicated by the prices paid, these generic domain names are highly valuable commodities that are sought after in the New Economy.7

projects that you have started on behalf of your clients are now on the back burner.

Your office telephone is ringing, and you quickly glance at the caller ID display. It is a call from one of your VC clients. The client asks: "Will we have a chance to salvage any of the cyberassets? Who will get the domain names? What will happen to the proceeds of the sale of the cyberassets in the event that some of the e-companies are heading toward bankruptcy?" You do not have any answers, but you promise your client that you will look into the matter further.

"perfection,"12 "financing statens,"13 and "collateral"14 leap out at you. You wonder whether domain names are personal property for the purposes of secured transactions under state commercial law statutes. You are sweating a little bit more.

sector has revealed that for most Internet companies filing for bankruptcy, the most valuable remaining assets are intangible assets.18 Often, domain names are the only remaining valuable assets, tangible or intangible, as these Internet companies approach insolvency.19

As bankruptcy trustees and creditors glimpse the bankruptcy estate, fundamental questions of security interests in domain names and perfection of such interests must be resolved prior to any attempt to determine priority of conflicting interests in the cyber-assets, particularly domain names. Specifically, are domain names personal property that can be used to secure payment and performance of an obligation? If so, what method of perfection should be employed for securitization of domain names? This Article will address these issues and will propose two methods for perfection of security interests in domain names.

security interests in trademarks may provide some guidance to the formation of a perfection scheme for security interests in domain names.

Unlike the perfection of security interests in trademarks, an attempt to securitize domain names encounters the troublesome issue of proper classification of domain names. Is a domain name a creature of the contract for services between the domain name registrar and the registrant? Is a domain name legal property? Is there a property interest in domain names? Part TV will examine the commnercial treatment of domain names in the open market as well as relevant federal statutes and judicial opinions relating to domain names in an attempt to ascertain whether domain names are "personal property" for purposes of secured transactions under Article 9 of the UCC.23

Part V will propose two methods of perfection of security interests in domain names. The first proposal would involve a state-regulated scheme through which creditors perfect their security interests in domain names by filing a financing statement with the applicable state filing office.24 The second proposal would create a scheme, based in federal law, through which creditors perfect their security interests in domain names by electronically filing a financing statement with a domain name registrar who then records the security interest information with the WHOIS database.25 The Part concludes by evaluating the strengths and weaknesses of each method.26

II. Perfection and Federal Preemption

able."28 Such security devices were ineffective, confusing, and failed to promote commercial financing.29 The original version of Article 9 replaced such pre-UCC devices.30 Article 9 went through its first revision in 1972 and was most recently revised in 1999, with the changes becoming effective on July 1, 2001.31